Fed Could Taper in December As Job Market Improves, Bullard Claims

Fed Could Taper in December As Job Market Improves, Bullard ClaimsSt. Louis Federal Reserve Bank President James B. Bullard hinted on Monday that there may be a possibility the Federal Reserve would start “tapering”, or curtailing its bond purchases at its next policy meeting. This meeting is to be held from December 17 through 18, though analysts believe that the Fed will postpone its tapering plans to early next year.

According to Bullard, a “small taper” may be what the Fed needs to recognize the warm tenor of economic data released as of late, particularly in the employment sector. “A small taper might recognize labor market improvement while still providing the (Fed’s policy-setting) committee the opportunity to carefully monitor inflation during the first half of 2014,” said Bullard in a slide presentation made this week in St. Louis.

“Should inflation not return toward target, the committee could pause tapering at subsequent meetings.” The Fed’s tapering is currently being done to the tune of $85 billion worth of Treasuries and mortgage-backed securities, and has been done since September 2012 pursuant to lower interest rates and improved statistics in terms of economic growth, employment and investment.

Bullard also maintained a hawkish stance vis-à-vis keeping interest rates low until unemployment statistics reach a certain threshold; he said that revising the unemployment rate threshold could be harmful to the Fed’s credibility. He said that he would be in favor of the Fed vowing not to increase rates until inflation rises to a specific threshold, 1.5 percent for example, though such an idea has not received a lot of backing among other Fed movers and shakers. In addition, Bullard postulated that it would be simpler for Fed policymakers to ensure rates remain low even after unemployment rates reach 6.5 percent, and possibly “just as effective” in ensuring markets that rates will not make an imminent increase following a Fed taper.

Speculation of the Fed tapering its bond-buying stimulus has resulted in a dramatic increase in mortgage rates; whereas 30-year mortgage rates were in the 3.30 percent to 3.40 percent range as of May 2013, the so-called “summer spike” brought about by speculation of an imminent taper led to rates increasing by over one percentage point between May and September. While rates have since stabilized a bit, they appear to be going up once again, and it may not be unconceivable for rates to go even higher with talk of tapering heating up again.

According to data from mortgage buyer Freddie Mac, 30-year mortgage rates were at 4.46 percent as of the past Thursday, an increase of 17 basis points from the previous week’s 4.29 percent. In addition to tapering, the aforementioned positive vibe of economic data and reports has also driven mortgage rates upwards. Experts believe that an increase in mortgage rates could be an albatross for a resurgent housing market, and may hurt refinance activity and demand for home purchases.